As an accountant — well, actually, someone with an accounting background — I have a keen interest in corporate accounting and the integrity of corporate financial statements. Unfortunately, sometimes those two things don’t comfortably co-exist (integrity and corporate financial statements).
While Generally Accepted Accounting Principles (GAAP), the set of standards that guides the presentation of corporate financial statements and supporting documents, may seem like a monolithic set of rules that are carved in stone with little or no room for interpretation, the bodies of financial statements that have been manipulated in the name of GAAP are piled high in a back room somewhere. There’s nothing like the pressure of analysts expectations for earnings or a large bonus on the line to get C-Suite executives to pressuring the CFO to fudge data just a bit…or a lot.
And when the watchdog is otherwise occupied, it would seem that the temptation would be even greater to bend or break the rules because there is that much less chance of being caught, when the odds were never that great in the first place.
So I was happy to see (it’s funny what can make me happy, but what can I tell you) that the new chair of the SEC, Mary Jo White, and her co-enforcement chiefs have decided to make accounting fraud a top priority of the SEC, according to the Wall Street Journal. Due to distractions from the financial crisis and budget cuts (my surmise), accounting fraud related enforcement actions have dropped by more than half from what they were in 2003 to 2005.
As corporations become more sophisticated and financial instruments more opaque, it is more necessary than ever before that the SEC stay vigilant and do its best to combat corporate accounting fraud. This is especially true given the fact that auditors have been shown again and again to side with management and allow egregious accounting practices to go unchallenged. Either that, or many are genuinely asleep at the wheel with what’s happened over the past few years.
Without the assurance that financial statements genuinely reflect the financial activity and results of corporations, shareholders are operating in the dark. And we deserve better than that.